Monday, April 30, 2007

"...But in the end there is no escaping that for many Democrats, this is all about politics. Both President Bush and the war in Iraq are unpopular, and the Democratic leadership hopes to capitalize by opposing both of them.

"We are going to pick up Senate seats as a result of this war," Reid said candidly at an April 12 press conference. "Senator Schumer has shown me numbers that are compelling and astounding." To which Schumer, chairman of the Democratic Senatorial Campaign Committee, added: "The war in Iraq is a lead weight attached to their ankle. . . . They are looking extinction in the eye." He spoke those words, Congressional Quarterly observed, "making no attempt to hide his glee."

That glee is very telling. It would be one thing for lawmakers to conclude regretfully that America's campaign in Iraq has failed and that bringing the troops home is the least bad option left. Were that the case, voting to pull the plug would be a sad and painful duty, one no member of Congress would carry out with "glee."

Yet when the House of Representatives voted last month to force a withdrawal from Iraq, Democrats were jubilant.

...Senator John McCain, adamantly supporting the current "surge" in Iraq, says he would rather lose a presidential campaign than a war. Democrats, all smiles, prefer to lose the war and win the campaign. They're not alone. In Iraq, Al Qaeda is smiling, too."

OIL DRILLING EXPANSION...Interior Secretary Dirk Kempthorne will provide insight on plans to expand oil and gas drilling in the Gulf of Mexico and authorize preliminary exploration studies in waters off the coast of Alaska and Virginia.

Dan Yergin, president of Cambridge Energy Research Associates will follow with his perpsective on this energy development.

AL QAEDA & IRAQ...Retired US Army General Barry McCaffrey will weigh in with his analysis.

Sunday, April 29, 2007

Our last best hope in Iraq — General David Petraeus — reminded Pentagon reporters this week of a critically important fact long forgotten by most observers: Our real enemy in Iraq, the true source of all the murders, mayhem, and instability, is not sectarian strife. And it’s not the Sunnis or the Shiites either. The real enemy we face in Iraq is al Qaeda.

According to the top American commander in Iraq, al Qaeda’s number one priority is defeating the United States in Iraq. The general called this organization “public enemy number one,” adding that “Iraq is, in fact, the central front of al Qaeda’s global campaign.”

Senate Majority Leader Harry Reid doesn’t understand this. Nor for that matter, do the other defeatist Democrats carelessly demanding our immediate withdrawal. They fail to grasp that the root of our problems in Iraq — again, the true source of the hostilities — remains al Qaeda. These murderous thugs are fomenting the sectarian strife on both sides of the Iraqi street. Their tactic is the nadir of nihilism.

In contrast to the blind Harry Reid contingent, I’d like to highlight one remarkably clear thinker who does get what’s going on in this war — someone who recognizes the true enemy and is able to articulate his position in breathtaking clarity. I’m talking about Senator Joe Lieberman of Connecticut. Frankly, no public official understands what’s at play better than Mr. Lieberman. He set forth his lucid position in Thursday’s Washington Post, and brought it alive when I interviewed him on Kudlow & Company later that day.

Joe Lieberman forcefully stated that “Al-Qaeda, after all, isn’t carrying out mass murder against civilians in the streets of Baghdad because it wants a more equitable distribution of oil revenue. Its aim in Iraq isn’t to get a seat at the political table; it wants to blow up the table — along with everyone seated at it.” (Emphasis added.)

To miss this point is to miss the crux of this conflict. There can be no doubt about the central role being played by al Qaeda in this war. Their domination of the Iraqi theatre is unmistakable. They are the hinge of this war. And, lest we forget, these are the same murderers who bombed us on September 11, 2001. They are terrorists who have made crystal clear their intention to subvert us at every turn. And make no mistake about it — they are regrouping in order to strike us again.

This is why the stakes are so high, and why we must not interrupt the surge. This is why there can never be a so-called “political settlement” unless and until the U.S. can militarily cripple al Qaeda in Iraq. Only then can a political settlement be reached, one that can provide for a healthy representative government, oil sharing, proportional staffing in ministries, and on down the line.

Without question, it is a near certainty that Iran and Syria are helping al Qaeda with money, arms, and explosives. And yes, if we leave now, al Qaeda will have an open field in which to expand their operations and prepare for the ultimate attack on the United States. In fact, the Defense Department and the CIA just nabbed a high-ranking al Qaeda operative known as al-Iraqi. He was a key link between the Taliban in Afghanistan, al Qaeda in Iraq, and al Qaeda members in Iran. And while it’s great news we got him, he’s one more reminder that this network is strong and playing for keeps.

Another reality, too often overlooked, is that the U.S. successfully removed Saddam Hussein from the world scene. We ended a ruthless, tyrannical dictatorship. We fostered three heavily participated elections in Iraq, and helped establish a new democratic government in the center of the Middle East. These are important accomplishments. Yet the stated goal of al Qaeda is to sabotage all of this. Their aim is to prevent representative government in the region, since their twisted totalitarian ideology opposes such developed-world things.

The Harry Reids in Washington don’t get it. They fail to see the terrorist fingerprints. But when you look at Iraq through the Lieberman lens, the dust settles. The task before us becomes clearer. Why are we in Iraq? We are fighting al Qaeda. Period.

A final question for Mr. Reid: If, as he says, we have “lost” the Iraq war, who exactly has won? Who is the winner, Senator Reid? Who would you like the United States to surrender to?

It’s not the Sunnis. It’s not the Baathists. It’s not the Shiites. And it’s certainly not Prime Minister Maliki. In conventional warfare terms, Harry Reid is suggesting we surrender to al Qaeda.

Does the majority leader of the U.S. Senate understand his own unthinkable conclusion?

This is big stuff. It's been playing at the top of the Drudge Report all day. $48.7 billion dollars for the April 24th tax date. That is the largest in history, Arthur, the largest in history. It's almost all from cap gains, nonwithheld.

I did a little math, Art. Since the Bush tax cuts of mid-'03, the fiscal years '04, '05, '06 and we're almost halfway through '07, nonwithheld tax receipts up $144 billion, or 59 percent. Now, Art, I know you take a lot of flak in government accounting circles. They say lower tax rates lose revenues. This says lower tax rates increase revenues. Could you comment for us? Could you teach us something here?

LAFFER: Well, I just love these numbers, Larry. And, frankly, the one area where you can really expect to see this type of response is in capital gains, in the nonwithheld areas. I mean, the size of this one day receipt is so much larger than the next largest day's receipt, it's amazing. If you look all around this country, I don't see how people can think that you really should let these tax cuts expire. We're almost in balanced budget right now. It's coming very close. Just let this thing keep going. Don't stop it. I don't know why these people want to stop it, Larry.

KUDLOW: Liz, I just want to ask you. Last night we ran a segment, Goldilocks and the three bears. Goldilocks being the Bush tax cuts, the three bears potentially being Hillary, Obama and Edwards, who want to reverse the tax cuts. What's your thought? What Arthur is saying about the cap gains revenue yield, does that link to this bull market in stocks?

LIZ MacDONALD: Absolutely, and I think the world of Art Laffer. I privately call him Saint Art Laffer. Because God bless him, because he's really shown the way here. And here's the deal: the capital gains tax is a voluntary tax. In other words, people will sit on it and not pay it if the tax rates are high. When they go low, they will unlock those assets, right? And this is the best noninflationary liquidity that you can bring into the market. So yes, I am worried about the Democratic Congress coming in and removing these very powerful forces that are driving the stock market forward.

ECONOMY...David Resler, Chief Economist at Nomura Securities International will join the panel to lend his perspective.

AN INTERVIEW WITH SEN. JOE LIEBERMAN...We'll discuss the future of Iraq, the war spending bill, John McCain, and whether he'd consider jumping over to the GOP.

BILL BENNETT...The brilliant American conservative pundit and author of America: The Last Best Hope will join us and offer his take on the Lieberman interview and a host of other political issues.

SAM WATERSTON... The "Law and Order" star will discuss the new movement he's leading known as Unity '08. It's a bipartisan organization aimed at fielding a legitimate third party candidate for president in 2008.

It's going to be another great show this evening. We hope you'll join us at our usual time & place - 5pm ET on CNBC.

Here's Jerry Bowyer's excellent take on Dow 13,000 and the success of the supply-side over at NRO...

Question: What do Neil Cavuto and most of the folks over at Fox News; Steve Forbes, Rich Karlgaard, and much of the intellectual inventory over at Forbes magazine; Larry Kudlow, Art Laffer, Don Luskin, Brian Wesbury, and most of the other money types who pop up around 5 p.m. EST each weekday on CNBC; the crowd over at the Wall Street Journal editorial page; and the full complement of writers right here on NRO Financial have in common?

Answer: They stuck to their models when the financial world was awash in pessimistic hysterics, and reminded all who would listen that the underlying economy was strong, that the 2003 tax cuts would do their magic, and that smart investors and entrepreneurs would act accordingly and put their money to work. They were ridiculed. They were shouted down. They were attacked. And they were ignored by the vast hoard of pundits and talking heads. But in the end they were right.

Dow 13,000.

If you thought like the members of the optimistic club, you made a lot of money. And if you thought like their detractors, you got crushed.

That’s how it’s supposed to work: Markets are leadership evaluators. They assess the pronouncements of presidents and Fed chairmen. They appraise the decisions of CEOs. They prove or disprove the predictive power of financial forecasting models: Keynesian, Rubinomic, populist, Marxist, supply-side. Each model guessed at what was in store for investors and the economy all across the 2000-07 period. And only one model, the supply-side one that links growth and prosperity with low taxation and low regulation and free markets and a general environment of entrepreneurship and opportunity, consistently outperformed the rest.

I understand how hard it was for the optimists to hang in there. Four years ago, the received wisdom was so gloomy, that I had to take out a second mortgage in order to publish a book (The Bush Boom) that linked the fiscal policies of the current president with economic prosperity. But my optimism was borne of supply-side fundamentals, so I could take it to the bank.

I was on a panel recently with Herb Greenberg from MarketWatch. He asked the panelists, “How is anyone supposed to know what’s going to happen? You guys all have a different opinion.”

“Track record,” I answered.

And I didn’t mean individual track records; I meant the model’s track record.

The classical model now known as supply-side economics has consistently explained events in ways that other models have not. The stagflation of the 1970s was a mystery to establishment economists, but not to supply-siders Art Laffer and Bob Mundell. The turnaround of the 1980s was “impossible” according to many, but it happened anyway. And the 1990s proved that Reaganomics works even when it’s employed by a centrist, Southern Democrat.

And then there’s the Bush boom: maligned, denied, attacked. But, in the end, it was predictable.

Just finished taping an interview with Sen. Joe Lieberman in midtown. The battle-hardened Senator is coming on the show to discuss Iraq, Iran, and why he voted against the Democratic Iraq funding resolution today.

One question I asked Mr. Lieberman was whether he’s ready to switch parties yet? Whether that might be an effective action to help win the war? He gave a very interesting response to that question…and he left the door open to supporting Sen. John “Backbone” McCain for President.

Also, be sure to check out Mr. Lieberman’s excellent op-ed in today’s Washington Post where he argues only one choice exists that protects America's security—to stand, and fight, and win.

It was truly an historic day on Wall Street yesterday as the Dow Jones Index rocketed to a record-breaking, first-ever, 13,000 close with a dramatic 136-point surge.

And the best part is that the gains extend beyond the Dow.

Stocks surged across the board with a 15-point gain by the S&P 500 and a 23-point gain in the Nasdaq. Record closings galore for transports, utilities, and the Wilshire 5000. The S&P 500 is nipping at the bit, just 30 points away from achieving its all-time high. Meanwhile, both the S&P 400 midcap index and the S&P 600 small cap index hit all-time highs. The New York Stock Exchange index is at an all time high, while stock-indexes in Germany, the UK, France and Italy are all approaching their own all time highs.

If I may, permit me to once again call this what it is—the greatest story never told.

We are in the midst of the longest uninterrupted bull market run in memory. We have record low tax rates on capital, a benign inflation rate, and recent economic releases suggesting the Goldilocks soft landing scenario remains very much in place.

But in the end, it all boils down to two simple things—two stock market locomotives that have created enormous, still untapped, value in equities. Viewers have heard me talk about them night after night:

Wednesday, April 25, 2007

There is a simple explanation behind the stock market boom that is pushing the Dow over 13,000 into record territory—profits are high and interest rates are low. These are the two main drivers for stock market value.

When you combine them into capitalized profits (using the 10-year Treasury to discount earnings) what you find is this:

From the bottom, capitalized profits have increased 197 percent. But stocks have increased by roughly 90-100 percent. Therefore stocks have value. Stocks are cheap. Add to the mix a strong dose of record low tax rates on investment capital.

THE LATEST ON HOUSING & THE ECONOMY...On board are housing expert/Yale professor Robert Shiller; John Rutledge, president of Rutledge Capital; Robert Stein, senior economist at First Trust Advisors; and Gary Shilling, president of A. Gary Shilling & Co.

GENERAL PETRAEUS ON CAPITOL HILL...MSNBC Congressional Correspondent Michael Viqueira will provide all the latest developments.

Last night we welcomed George Schwartz back to Kudlow & Company. George is the president and portfolio manager of the four star Morningstar-rated Ave Maria Catholic Values fund.

His fund is up almost 8 percent year to date—roughly double the S&P. Incidentally, George’s five "Kudlow Stock Club" picks from back in early October are up a remarkable 28 percent. (Sometimes it pays to watch the show…)

According to George, all five of his latest stock picks are candidates for a private equity buyout. He says they're all underleveraged, so the leveraged buyout boys could come, leverage them up, and take them over at a much higher price. He believes all of them could double in three years' time, even if they're not taken over.

Without further ado, here are George’s picks and commentary from last night’s show:

Zebra Tech. (ZBRA) - It's a $41 stock, a midcap with a $3 billion market cap. Zebra is the world leader in bar code technology and related equipment. It's a financial fortress. They've got $7 a share in cash and no debt, growing at 15 percent per year in earnings and cash flow.

Foot Locker (FL) - It's a $24 stock on the Big Board. Foot Locker is the dominant industry leader in athletic shoe retailing. It's a perfect candidate for a leveraged buyout. Clean balance sheet, no debt, $2 a share in cash. They're buying back their own stock.

Legg Mason (LM) - Big cap company, $20 billion market cap. It's a $97 stock. It's a global asset manager. They got out of the brokerage business, they swapped their brokerage business to Citigroup for Citigroup's asset management division. An absolute money machine, extremely high profit margins, high return on equity, selling at 18 times earnings, very high quality.

American Science & Eng. (ASEI) - This is a micro cap company, half a billion dollar market cap, $51 stock. It's a homeland security, homeland defense-related company. The stock's down from $93 a year ago, where it was way overpriced, but now it's at $51, selling at 17 times earnings. They have $12 a share in cash with no debt. They make X-ray detection equipment to scan cargo and baggage, looking for drugs and illegal aliens and explosives.

Select Comfort (SCSS) - This is a $17 stock with a $1 billion market capitalization. They make the Sleep Number bed where you can adjust the firmness of the mattress with a dial. It's a perfect takeover candidate too. It's growing 20 percent a year, selling at 18 times earnings with no debt.

IRAQ WAR SPENDING BILL...Kelly O'Donnell, White House correspondent for NBC News will offer the latest and political commentator Pat Buchanan will weigh in with his perspective.

TOYOTA...Pat Buchanan and "Jimmy P" Pethoukis from U.S. News & World Report will debate the ramifications of today's news that Toyota beat GM for the first time ever in global sales during the first quarter.

A quick thought regarding today’s news that Toyota surpassed GM for the first time ever in global sales during the first quarter:

Toyota currently operates four vehicle assembly plants (with two more under construction) here in the United States. They’ve got facilities in Texas, California, Indiana, and Kentucky. The new $1.3 billion Mississippi Highlander plant is scheduled to go live in 2010. Toyota also runs two engine plants in Alabama and West Virginia.

Bottom line?

Toyota’s created a ton of good jobs here in the U.S. The actual number is somewhere in the neighborhood of 25-30,000 jobs. And that number doesn't include all the additional jobs created in those areas as a direct byproduct of Toyota's hiring. It’s yet another example heralding the benefits of free trade.

The real story is that Toyota is a great example of insourcing—of course made possible by free trade.

Here's a rundown of Toyota's U.S. operations:

Toyota operates FOUR vehicle assembly plants (with TWO MORE under construction) in the U.S.:

Monday, April 23, 2007

"I very seriously believe that capitalism is not only a better form of organizing human activity than any deliberate design, any attempt to organize it to satisfy particular preferences, to aim at what people regard as beautiful or pleasant order, but it is also the indispensable condition for just keeping that population alive which exists already in the world. I regard the preservation of what is known as the capitalist system, of the system of free markets and the private ownership of the means of production, as an essential condition of the very survival of mankind." -Friedrich Hayek

Friday, April 20, 2007

We received wonderful news earlier this week when the Supreme Court upheld the ban on partial birth abortions. This was great news—a life-affirming decision banning a truly appalling procedure. It scored a big, much-needed victory for the life of the precious unborn.

There was another, less visible piece of good news out of Washington this week. Namely, Democrats don’t have the votes to affect government sponsored price controls for drugs. Score it capitalism 10—socialism zero.

The lack of votes is one reason why pharmaceutical stocks are doing well, in addition to their good earnings reports.

Stopping socialist price controls and promoting the sanctity of life for the unborn are economic and cultural victories. Make no mistake about that.

A record volume of short sales by pessimistic hedge funds and other bearish naysayers is getting absolutely crushed. This market is rising because earnings are once again outperforming consensus estimates—and because interest rates are low, stable, and unlikely to change any time in the foreseeable future.

The mild consumer price index is a big contributor to this outlook of stable interest rates.

A powerful one-two combo of rising profits (which are mother’s milk of the stock market) and steady interest rates is a wonderful prescription for soaring stocks and rising American wealth.

So, Senate Majority Leader Harry Reid declared yesterday that the U.S. has officially “lost” the war in Iraq. Well, I’ve got a problem with that statement. At this point, declaring the Iraq war lost is not only factually incorrect, it is incredibly demoralizing for our troops whose lives are on the line.

Reid is wrong. The war is not lost. It's still way too early.

Let's remember that this isn't the Dems' first stab at undermining our war effort. Inititally, Harry Reid & Co. were attempting to telegraph to our enemy precisely when we would withdraw our troops. That’s unheard of in the history of warfare. Now, even worse, they’re out saying the war is lost. Huh? Where’s General Grant now that we need him? Where’s Robert E. Lee?

We need to give the surge a fighting chance. We're talking about America's future here.

(For more on Harry Reid’s statement and the future of Iraq, you can check out Jed Babbin’s column over at Human Events.)

One silver lining in the dark cloud hovering above Blacksburg is the noticeable lack of anti-South Korean sentiment among Americans. As the following story in The Christian Science Monitor points out, Americans have not allowed the evil actions of one evil man to tarnish their affinity for our friends in South Korea.

As a number of South Koreans point out, this would not likely have been the case had the roles been reversed. "Anti-Americanism would have become extreme," said the editor of social issues at The Korea Economic Daily.

"People [would] throw rocks at them and tell them 'Yankees go home," said the wife of a Korean diplomat. "People [would] go even crazier here if exactly the same incident at Virginia Tech happened here but committed by an American."

This comes as no surprise. Americans are good people, a forgiving people. Always have been. It is not in our nature to hold an entire country accountable for the actions of one hateful, murderous, individual.

A final thought and prayer: During this difficult and trying time, may the healing hand of God touch all those who mourn, whose lives have been forever changed. God bless the hearts of each and every one of them.

A new national poll shows Hillary Rodham Clinton's favorable ratings sinking like a stone, and her negatives soaring - a terrifying trend for a campaign desperately trying to convince voters she's not too polarizing to be president.

The new USA Today/Gallup survey shows Clinton's favorability rating shrunken to 45 percent - down 9 points from a similar poll taken last month, and a 13-point drop from a survey taken shortly after she announced her White House bid.

More troubling for her White House hopes, her unfavorable ratings have climbed 12 points since she entered the race, and now stand at 52 percent - meaning more Americans now dislike her than like her.

...Voters are watching the former first lady in her first extended period of national exposure since her health care debacle and don’t like what they see. She appears scripted, phony, artificial, and even boring. Her ridiculous attack on Obama last month completely backfired. And her southern-preacher accent in Selma was downright scary.

U.S. corporate taxes are way too high and they are inhibiting American competitiveness.

Loews CEO James Tisch (who also happens to be spearheading the tax reform group America Gains Coalition) has the story right. Namely, that the historically high corporate capital gains tax rate of 35 percent is stifling America’s economic growth.

It’s quite simple actually. Lowering corporate taxes would increase Treasury revenues, create jobs, and unlock dormant investment capital. It would make the U.S. more competitive, attract investment, and unleash growth throughout the economy.

It almost sounds too good to be true.

But the present reality is that corporations are sitting on literally trillions of dollars of gains locked up on their balance sheets. They’re sitting on this cash hoard because it doesn’t make sense to unlock them at the current 35 percent rate. It’s too high. Deals that look attractive on a pre-tax basis make little sense at all on an after-tax basis.

However, if Uncle Sam showed some economic spine and vision, it would recognize that it’s missing out on mountains of potential tax revenues with this onerous tax. The evidence speaks for itself--CEOs aren’t pulling the trigger on deals. But if the rate were lowered (or preferably abolished) from 35 percent to the 15 percent rate for individuals, corporations would be incentivized to unlock these gains.

Then, instead of getting 35 percent of nothing, the government would get 15 percent of something. Treasury would welcome a gusher of additional corporate tax revenues. After all, a little piece of a big pie is preferable to a big piece of a little pie.

Bear in mind that it’s the highest marginal tax rate that has the most inhibiting effect on economic growth. And right now the highest is the corporate rate which is running at around 40 percent (Fed plus state.) That’s the one to cut.

Incidentally, recent studies by Kevin Hassett and others show that not only would slashing the corporate rate result in making the U.S. more competitive, and attract more investment to our shores (as it has done with remarkable success in Ireland and Eastern Europe), but it would actually result in higher wages for American workers. This would help ameliorate the wage inequality problem because the tax savings would go roughly 70 percent to workers and 30 percent to shareholders.

Lively debate last night on Kudlow & Company between Don Luskin and Jared Bernstein...

KUDLOW: All right. Don Luskin, let me go to you. I'm looking at some of the distributional aspects of our current tax code. The top 1 percent now pays 37 percent of income taxes. Back in 1980, they only paid 19 percent. The top 5 percent pays 57 percent. That's up from--that's up from 37 percent back in 1980. And if you make over a million bucks, 181,000 people, they pay 19 percent of the income tax. Your thoughts, Don Luskin.

Mr. LUSKIN (Trend Macro Chief Investment Officer): Well, I'd like to borrow a word from Jared Bernstein, unfair. I'd like to know what's fair about getting one class of people to pay all the bills for another class of people, be they rich or poor. I'm sick and tired of hearing the word fairness used in this discriminatory way. It's a one-way use of a word, where it's fair if the rich pay more and it's unfair if the poor pay their fair share.

Mr. LUSKIN: No one is feeling sorry for anybody, Jared. I'm talking about fairness. I'm talking about equality. I'm talking about egalitarianism...

Mr. BERNSTEIN: So you want--so you want everybody to pay...

Mr. LUSKIN: ...the kind of thing that people like you spend your whole careers raving about. All I know is that it doesn't make any sense for a taxi driver who is willing to work two shifts to pay a higher tax rate than a lazy taxi driver who only works one shift. Now, you explain to me what is fair about a tax code that punishes enterprise.

Mr. BERNSTEIN: Well, you want to talk about fairness, let's talk about the Bush tax cuts. The reduction in tax liability...

Mr. LUSKIN: Well, why don't you answer my question first before we talk about the Bush tax cuts?

Mr. BERNSTEIN: The reduction--I think I am answering your question.

Mr. LUSKIN: What about those taxi drivers?

Mr. BERNSTEIN: I am answering your question. The reduction...

Mr. LUSKIN:Why is it fair for a hard-working taxi driving to pay a higher tax rate than a lazy taxi driver?

Monday, April 16, 2007

Tomorrow is Tax Day. And as is typically the case this time of year, there’s a whole bunch of tax related headlines in the major papers.

Investors Business Daily’s “An Unfair Share” is a must read, as are the WSJ’s “The Fiscal Bottom Line” by Ernie Christian/Bill Frenzel and “The Taxpaying Minority” by Ari Fleischer. Then there’s “Unpaid Taxes Tough to Recover” in the Washington Post and “Cleaning Up the Alternative Tax” (among others) in the Grey Lady. And so on and so on…

Looking at all these stories, I had a thought: we could deal—once and for all—with the horrible complexities of the IRS tax system, expand the economy, generate even more revenues, if (you guessed it) we moved to a nice, simple, flat tax system—somewhere around 20 percent for the single tax rate. Blow out all the deductions, all the credits, and bid fond farewell to the labyrinth of complicated rules that no one (including the IRS) understands.

Trust me, good things will happen.

I know, I know, there’s nothing perfect in life. But a nice Steve Forbes/Art Laffer flat tax system would be pretty darn close. It would sure make a great benchmark to measure and grade all the assorted half-baked tax proposals coming out of Washington.

"It's about time Bush finally discovers his veto pen. What I hear is the White House claims it's going to hold firm. I think this is a make-or-break. If he bends and allows the pork to go through, I think he will lose whatever moral high ground he has, and I think he will send a message to the Democrats he can be rolled." -John Fund, columnist for The Wall Street Journal's OpinionJournal.com on the pork filled Iraq funding bill. (From Friday night's Kudlow & Company.)

If the tax forms you're filing this year show Uncle Sam entitled to any income tax, you increasingly stand alone. The income tax system is so bad, and increasingly reliant on a shrinking number of Americans to pay the nation's bills, that 40% of the country's households -- more than 44 million adults -- pay no income taxes at all. Not a penny.

Think of it this way. After dropping off your tax forms at the Post Office, you find 100 people standing on the sidewalk. Forty of them will be excused from paying income taxes thanks to Congress. Twenty of them, the middle class, will pay barely a thing. The 40 people who remain, the upper middle class and the wealthy, will pay nearly all of the income taxes.

Look at that crowd again and find the richest person there. That individual will pay 37% of all the income taxes owed by those 100 people. The 10 richest people in the crowd will pay 71% of the income-tax bill. The 40 most successful people will pay 99% of everyone's income taxes. Yet for some lawmakers in Washington, these taxpayers aren't paying enough. Our tax system comes up short in a lot of areas. It doesn't foster economic growth. It isn't very simple. And it certainly isn't fair. The one place where it does excel is at redistributing income...

Friday, April 13, 2007

Gold prices are up $10 bucks today. The wholesale price index was not a good number. While the core rate was flat, food prices were up 1.4 percent. That’s the fourth straight month of one percent or more increases.

Consumer goods prices (which track with the CPI out next week) were up 1.4 percent in March, and now stand at an 8.6 percent annual rate.

Import prices rose 2.8 percent for the year ending in March, and 2.6 percent excluding fuels.

It’s hard to deny that inflation expectations are creeping higher.

And finally, many in the market have come to expect a softer dollar to ameliorate the U.S. trade deficit. Nothing definitive has come from Treasury Man Paulson or Fed Chief Bernanke. At this stage of the cycle, more dollar softness will translate into higher inflation.

The solution to all this? A stronger U.S. greenback. But will we get it?

In my book American Abundance, published in 1998, I talked about the Four Dead Bodies theorem of inflation. Just as you should strongly suspect murder if you discover four dead bodies in an alley, you should be very wary of future inflation if four key market-price indicators are acting in unison. These include rising gold, a soft dollar, expanding bond spreads, and strong commodities. Right now, all point to inflationary money from the Fed.

Some of my supply-side colleagues have been warning of higher inflation for the last few years on the basis of three dead bodies: rising gold and commodity prices and a soft dollar index. But I have avoided the inflation call because the bond market hasn’t signaled a move to higher price indexes. Frankly, the bond market is a far more broad, deep, and resilient indicator than gold, commodities, or the dollar. Hence, it deserves a disproportionately high ranking in the body-count scheme.

Additionally, the Treasury bond has even greater analytical meaning because of the inflation-adjusted bonds (or TIPS) that trade in the open market. Basically, the 10-year Treasury bond can be deconstructed into a growth component (the real rate) and an inflation component (the TIPS spread). And so far this year the 10-year TIPS inflation spread has risen about 21 basis points, putting it above its 5-year average.

So is it the fourth dead body? Well, the modest widening of the TIPS inflation spread may be a weak signal of inflation risk. But it also may be confirming the other inflation warning signals. The Fed must take notice...

Although White House Budget Director Rob Portman told me on Tuesday’s show that there would be no compromise deal on the pork section of the Iraq funding bill, Senator Kay Bailey Hutchison (R-TX) told me last night there could in fact be a deal.

Today’s Wall Street Journal also suggests a deal could be in the works. Apparently, rumors of pork’s death have been greatly exaggerated.

Any compromise deal on this roughly $25 billion of pork would seriously dilute the president’s strong message that he’s been selling for nearly ten straight days in his constant criticism of the Democrats. Namely, they don’t want to fund the war; they’re insisting on artificial troop withdrawal deadlines; they’re interfering with the commanders on the ground; and they’re breaking their pledge on budget restraint (and tax hikes).

The President is delivering a strong message. It’s a coherent message of war toughness and budget toughness. It’s a rallying cry to the country’s conservative base and it gives Congressional Republicans a bit more spine in the Democratic Congress. This is just what the political doctors ordered.

Some conservatives don’t care about the budget pork section of the Iraq funding bill. I’m not one of them—I do care. It’s all part of this new, effective Bush message—tough on the war and tough on the budget.

The bottom line here is if Mr. Bush overrules budget chief Rob Portman, and goes along with this pork spending compromise, his strong message will be greatly weakened.

Mr. Bush should stay on message for both Iraq and pork. It’s a good message.

On last night’s Kudlow & Company we discussed supply-side apostate Bruce Bartlett’s New York Times op-ed which said it’s time to kill the phrase "supply-side economics" and give it a decent burial. Of course I completely disagree. For starters, President Bush’s tax rate reduction once again proved the growth-building and revenue-raising success of the supply-side.

The Wall Street Journal’s Steve Moore made the point that supply-side economics is not just a phenomenon particular to the United States, but a revolution sweeping all over the world. Ireland, the Eastern European countries are all moving toward low, flat taxes with tremendous success.

Mr. Moore added that getting rid of the term “supply-side economics” is like telling McDonald's to change the name of their hamburger, or Google changing the name of their company. It has become a brand that's identified with the "Gipper" and identified with successful tax policies all over the world.

The data support Moore’s argument. As I pointed out, ample historical evidence demonstrates the benefits of cutting marginal tax rates. In the '60s, after the Kennedy tax cuts, revenues soared almost 100 percent. In the '80s, under the Reagan tax cuts, revenues shot up 67 percent. And following the Bush tax cuts—it's only been three years—revenues have risen 35 percent.

These columns have had more than one disagreement with John McCain over the years, especially on issues that typically win the Arizona Republican accolades from the rest of the media…Yet now that he is under attack from his erstwhile media "base" for refusing to repudiate the war in Iraq, we think he deserves some covering fire. The word for what he's demonstrating is character.

…[McCain] has demonstrated that his views on [Iraq] are serious and born of belief, not of polls. That's more than can be said for most of our political and chattering classes, and a reason to admire a politician whose newfound unpopularity coincides with his finest political hour.

The United States has been blessed with virtually uninterrupted prosperity for 25 years.

Over the past 100 quarters beginning in 1982, only five of them have been negative. Five. That means American workers and their families have been in prosperity 95 percent of the time.

It wasn’t always so good. As my friend Brian Wesbury noted on last night’s show, between 1969 and 1982, the US economy slogged through recession 33 percent of the time.

The credit for this remarkable economic transformation belongs to Ronald Reagan.

It was his sound economic vision and leadership that struck the match underneath this roaring American economy. It was his pro-growth policies of slashing taxes, deregulating, disinflation, and all the rest of it, that produced our nearly three decade long track record of success.

Since then, our strong, resilient, capitalist economy has been charging full steam ahead, one president after another. And for the most part, Reagan’s successors have been good stewards of their bounty.

WASHINGTON - The White House says the economic surge that began five and a half years ago on President Bush's watch is more robust than the much-touted expansion during the Clinton administration.

"This is a much stronger expansion in a lot of ways," White House spokesman Tony Fratto told The Examiner. "It's much deeper and more measured."

Fratto's assertion was disputed by Gene Sperling, economic adviser to presidential candidate Hillary Rodham Clinton, who spoke to The Examiner in his capacity as former National Economic Adviser to President Bill Clinton.

"That's a rather absurd claim," said Sperling, a senior fellow at the liberal Center for American Progress. "In terms of job creation, in terms of wage growth, in terms of business investment, in terms of poverty, there's absolutely no comparison."

"The expansion during the 90s was exceptionally strong," he said. "And this has been a historically weak expansion in virtually all of those measures."

Fratto cited last Friday's stronger-than-expected jobs report as evidence of the strength of the economy under Bush. The Labor Department reported that 180,000 new jobs were created in March and the unemployment rate fell to 4.4 percent, matching a five-year low.

"If you go back to this point in the Clinton expansion," Fratto said, "they would have loved to have seen the numbers that we have right now."

"On the unemployment rate, we're a full percentage point below where they were at the same point in the expansion - 60 or 61 months in," he said. "They would have loved to have been at 4.4 percent. They were still up in the mid-5s, which is huge, when you think about it."

Sperling conceded that "the headline on the employment rate is certainly sound."

"But if you look beneath that, at the number of people who have dropped out of the labor force, the length of unemployment period, even that is not as strong as it appears," he said.

Economist Larry Kudlow said the Clinton and Bush expansions "each have their minuses and pluses."

"Every expansion has a little different coloration," he said. "The Clinton years were colored by the technology boom and the dot-com boom, which ultimately produced a bubble that burst. The Bush years were colored by the tremendous housing boom from the Greenspan interest rates, and we're undergoing some kind of a bubble bursting right now."

Kudlow said neither Bush nor Clinton have fundamentally transformed the U.S. economy in the way that former President Reagan did a quarter century ago. He credited Reagan's economic reforms for growth in the Gross Domestic Product in 93 of the last 98 quarters.

"Since the early Reagan years, we have had 25 years of virtually uninterrupted prosperity," Kudlow said. "Because of the Reagan reforms - the deregulation, the lower taxes, the disinflation - we have transformed the economy from a top-down, government-run operation into a free market, capitalist economy with durability and resilience."

(Note: Something else I told Bill Sammon that didn’t make the story was the positive benefit from President Bush’s 2003 reduction in marginal tax rates—especially on capital. Obviously this has given the Bush recovery a big push in the past four years. And it’s also worth noting however, that while President Clinton raised taxes in his first term, he lowered tax rates in his second term. That included a cap gains tax cut for investments and housing.)

Friday, April 06, 2007

The U.S. Bureau of Labor Statistics delivered a blockbuster jobs report this Good Friday morning: 180,000 new jobs in March, 32,000 upward job revisions for the prior two months, and a 4.4% unemployment rate.

This stronger than expected report puts the lie to those perma-bear pessimists who keep predicting recession from the sub-prime mortgage problem and the housing slowdown (both a function of tighter Fed money over the past two years).

But the free-market US economy, with its low tax-rates, is more durable and flexible and bigger that just housing and mortgage finance. In the March job report, big job gains came from business construction, retail trade and a variety of services.

Unemployment for those with a bachelors degree or higher was only 2.2%. For traditional families with both spouses present, joblessness was 2.5%.

The rate of economic growth ebbs and flows over long expansion periods such as this one (which is now in its sixth year). Sometimes faster, sometimes slower, but in the absence of major policy blunders (big tax hikes, bad inflation, major trade barriers, nasty regulations) the economic pie keeps expanding.

Stocks have been predicting continued growth for quite some time. Since last summer, the major indexes are up about 20%. Year-to-date they are up roughly 3% so far. Since the Bush tax cuts they're up roughly 100%.

Isn't it interesting that markets are better economic predictors than perma-bears?

I’m not taking sides yet in the Republican presidential race, but I think it would be a big positive if Rudy Giuliani suggested that Steve Forbes—who is backing Mayor Giuliani—would be his Treasury Secretary if he were elected.

On flat tax reform, free trade, spending cuts, deregulation, and just overall good capitalist principles, there is no one who does it better than Steve Forbes.

Not enough troops, not enough money, not enough gear in order to meet the needs of the post 9/11 global war on terror. Troops are tired.

And quite simply, Pentagon spending as a share of GDP is 3.8 percent now. It was 9.8 percent at the height of the Vietnam war, 11.7 percent during Korea, and 4.4 percent in 1991 at the end of the Cold War.

Gen. Barry McCaffrey suggests inadequate financing and the other Army problems is a dereliction of duty.

Wednesday, April 04, 2007

"Some wealthy elitists in our country, who cannot tell fact from fiction, can afford an Olympian detachment from the impacts of draconian climate change policy. For them, the jobs and dreams destroyed as a result will be nothing more than statistics and the cares of other people. These consequences are abstractions to them, but they are not to me, as I can name many of the thousands of the American citizens whose lives will be destroyed by these elitists' ill-conceived ‘global goofiness' campaigns."- Bob Murray, founder/CEO of Murray Energy Corporation

Well, that didn’t take long: Just a few months into their majority, Senate Democrats are already itching to raise taxes. President Bush’s tax cuts are scheduled to expire in 2010. The Senate just passed a budget that extends the most popular of the tax cuts: notably the child credit and the tax-rate cut for low-income workers. But the budget also stipulated that if the other tax cuts are extended, too, they have to be balanced with tax increases or with cuts in entitlement programs. Since entitlements aren’t going to be cut by the requisite $900 billion over four years, that’s a recipe for a massive tax increase on dividends, capital gains, and high earners. If Democrats wanted to design a tax increase that did the most damage to economic growth for every dollar raised, they could hardly do better. This budget passed the Senate on a party-line vote, with only the Maine Republicans defecting to support it. President Bush may be down in the polls, but our guess is that the public will side with him if he stands up for taxpayers, as he should.

KUDLOW: Well if I were Gary Shilling, or if I were Barry Ritholtz, or if I were Dougie Kass...if I were one of those chaps, they would say that Armageddon is coming because of the subprime mortgage problem.

DON LUSKIN: Well, I just simply don't agree. You know, I've got 55 institutional clients who are the best and the brightest, and half of them are organizing right now to raise money for new funds. They're going to be vulture capitalist funds. They're going to buy all the subprime stuff at 10 cents on the dollar. They're outbidding each other to take this stuff out of weak hands and put in into strong hands. There's so much money in the world. It's going to absorb this problem, just like it's absorbed all the others the last few years.

Very good op-ed in today's Wall Street Journal called "The Trouble with Islam". It was written by a Muslim medical doctor/Muslim reformer who was formerly part of an Islamist terrorist group.

Well worth a read...

Not many years ago the brilliant Orientalist, Bernard Lewis, published a short history of the Islamic world's decline, entitled "What Went Wrong?" Astonishingly, there was, among many Western "progressives," a vocal dislike for the title. It is a false premise, these critics protested. They ignored Mr. Lewis's implicit statement that things have been, or could be, right.

But indeed, there is much that is clearly wrong with the Islamic world. Women are stoned to death and undergo clitorectomies. Gays hang from the gallows under the approving eyes of the proponents of Shariah, the legal code of Islam. Sunni and Shia massacre each other daily in Iraq. Palestinian mothers teach 3-year-old boys and girls the ideal of martyrdom. One would expect the orthodox Islamic establishment to evade or dismiss these complaints, but less happily, the non-Muslim priests of enlightenment in the West have come, actively and passively, to the Islamists' defense....

CAMPAIGN FUNDRAISING...we'll look into each presidential candidate's war chest with Larry Sabato, UVA political scientist and Congressional Quarterly's Rachel Kapochunas

AL QAEDA, IRAN & THE WAR ON TERROR...Jed Babbin, editor of Human Events and Joe Cirincione, Vice President for National Security and International Policy at the Center for American Progress will debate.

Please join us at 5pm ET for another edition of CNBC's Kudlow & Company - we still believe free market capitalism is the best path to prosperity.

Early reports from the tax-cutting Club for Growth meeting in Florida give high marks to Rudy Giuliani, Mitt Romney and Newt Gingrich in the Republican presidential supply-side sweepstakes.

I guess John McCain didn’t do as well as he’d hoped, since he was in Baghdad and not in Palm Beach. (Baghdad is obviously very important—hopefully Senator Backbone will eventually come up with a tax-cutting plan of his own.)

One source at the CFG meeting tells me that former House Majority Leader Dick Armey gave the best speech of the conference emphasizing economic freedom.

My friend “Jimmy P” from U.S. News & World Report wonders whether the era of tax cuts is over largely because of new pay-as-you-go budget rules formulated by a Democratic Congress obviously opposed to President Bush’s tax cuts.

Let’s pause for just a moment on this: As a supply-sider and “Laffer Curve” devotee, I would argue that the best way to raise revenues to balance the budget is to reduce marginal tax rates. As Alan Reynolds has shown, the tax share of GDP actually increased during the supply-side tax cuts of John F. Kennedy, Ronald Reagan, and George W. Bush.

Tax revenues have been surging from personal incomes, capital gains, and dividends. Now, the Congressional Budget Office would try to argue that these revenues are lower than would have been the case if taxes had not been cut. But who’s to say? Economic growth would’ve been slower and hence revenues without tax cuts might have been lower. All we know is what we know—namely, revenues have been steadily rising in the aftermath of lower tax rates.

This view is at odds with Washington’s official scorekeepers. But Republican presidential candidates should be out making this point. Rudy Giuliani hinted at this in my CNBC interview. Mitt Romney is close to it.

But if the Bush tax cuts are to be extended, or if corporate tax rates are lowered, or if flat tax reform is proposed, then the dynamic scoring of supply-side tax rate relief becomes an important intellectual and political talking point.

About Me

Larry Kudlow

Lawrence Kudlow is CNBC’s Senior Contributor. For many years, he was the host of CNBC’s “The Kudlow Report”. He is also the host of The Larry Kudlow Show, which broadcasts on Saturdays from 10am to 1pm ET on WABC Radio and is syndicated nationally by Cumulus Media. He is also a nationally syndicated columnist and a former Reagan economic advisor. CNBC's The Kudlow Report also airs on Sirius (ch.129) and XM (ch.127) weeknights at 7pm ET.